Define RBI Guidelines

RBI Guidelines on MMMFs

The setting up of MMMFs would require the prior authorization of the Reserve Bank. Furthermore, the MMMFs to be set up by banks, their subsidiaries and public financial institutions would be required to comply with the guidelines and directives that may be issued by the RBI from time to time. Although the guidelines were issued in 1992-93, yet no institutions has so far come forward to establish a MMMF. The major hurdle has been the stringent limits for investments prescribed by the RBI. Moreover, the relative quietness on the money market front led to the absence of the “necessity” factor to establish MMMFs.

In November 1995, the RBI permitted the private sector mutual funds to set up MMMFs, with a view to provide greater liquidity and depth to the money market. While allowing the private sector MFs, the RBI also relaxed some of the earlier guidelines. The important relaxations were

Ceiling for raising resources and minimum size of ` 500 million withdrawn.

Minimum limit 25% while investing in T-bills and the Government of India papers of residual maturity upto 1 year withdrawn

Maximum limit of 30% while investing in call/notice money withdrawn

Maximum limit of 15% while investing in CPs withdrawn

Maximum limit of 20% while investing in Commercial bills withdrawn

Dividend / income on subscriptions by individual NRI in MMMFs can be repatriated, but not principal

Private sector MMMF should need the RBI and SEBI approval

In April 1992, the Reserve Bank announced the guidelines for Money Market Mutual Funds. The Reserve Bank had made several modifications in the scheme to make it more flexible and attractive to banks and financial institutions. These guidelines were subsequently incorporated into the revised SEBI regulations. In October 1997, MMMFs were permitted to invest in rated corporate bonds and debentures with a residual maturity of up to one year, within the ceiling existing for Commercial Paper (CPs). The minimum lock-in period was also reduced gradually to 15 days, making the scheme more attractive to investors. MMMFs would come under the purview of SEBI regulations. Banks and Financial Institutions desirous of setting up MMMFs would however have to seek necessary clearance from RBI for undertaking this additional activity before approaching SEBI for registration.